Aging and Immigration in Europe – In addition to their integration into the labor force, the human capital of migrants is thus also a major determinant of their economic impact

This paper provides a systematic, multidimensional demographic analysis of the degree to which negative economic consequences of population aging can be mitigated by changes in migration and labor-force participation. Using a microsimulation population projection model accounting for 13 individual characteristics including education and immigration-related variables, we built scenarios of future changes in labor-force participation, migration volumes, and their educational composition and speed of integration for the 28 European Union (EU) member states. We study the consequences in terms of the conventional age-dependency ratio, the labor-force dependency ratio, and the productivity-weighted labor-force dependency ratio using education as a proxy of productivity, which accounts for the fact that not all individuals are equality productive in society. The results show that in terms of the more sophisticated ratios, population aging looks less daunting than when only considering age structure. In terms of policy options, lifting labor-force participation among the general population as in Sweden, and education-selective migration if accompanied by high integration, could even improve economic dependency. On the other hand, high immigration volumes combined with both low education and integration leads to increasing economic dependency. This shows the high stakes involved with integration outcomes under high migration volumes.

The conventional way of only considering the changing age composition of the population has served as the foundation for the widely discussed UN study on “Replacement Migration” (1), which concluded that migration can help avoid population decline but that a stop in the increase of the total age-dependency ratio would require implausibly high volumes of immigrants and would therefore be unrealistic. Here we show that when adding labor-force participation and education as additional demographic characteristics to the analysis, the projected dependency ratios will increase much less than previously expected under baseline trend assumptions. When the model also covers the effect of education on productivity and not only on labor-force participation––an innovation introduced here––the projected increase in burden under the baseline scenario is only a low 10% by 2060. This means that much of the fears of population aging seem exaggerated. As this increase is modest, either moderate migration levels, if migrants are well-educated and integrated, or an increase in labor-force participation among the general population can fully compensate for it.

Under a Canadian migration scenario––high volume of well-educated immigrants, but with intermediate integration––the EU would experience virtually no increase in this dependency ratio accounting for labor-force participation and productivity. However, since many developed countries seek to attract highly qualified migrants, the international supply might not be sufficient for high levels of skilled migrants in the EU. In addition, a larger number of immigrants might deteriorate their economic integration, because resources from the government are limited and the competition among workers with similar profile would be more intense (24). In this case of a scenario of a high number of immigrants, but poorly qualified and economically integrated, the EU’s dependency ratio would worsen by a significant 20% increase. But, if special efforts for economic integration of migrants into the labor force were made to have them reach the same participation rates as natives (Canadian/Hi_Int scenario), it would actually lead to a decline in this dependency ratio similar to the projected decline under the assumption of higher labor-force participation rates in all EU countries to the level observed in Sweden today. This shows the high stakes involved with integration outcomes under high migration volumes. If migration in Europe would be simultaneously associated with policies leading to increasing labor-force participation of the native population (assuming that today’s Swedish participation rates will be reached by all countries by 2050) this (Canadian/Swedish_LF) scenario would actually result in a substantial decline in the dependency burden by around 20%. Conversely, if the EU decides to follow the Japanese model by drastically reducing the number of immigrants, its population size would naturally be much lower, but since those migrants are highly qualified, such scenario would result in the same ratio of workers to nonworkers once weighted for productivity compared to the baseline scenario. In addition to their integration into the labor force, the human capital of migrants is thus also a major determinant of their economic impact.

Although demographic aging is unavoidable in Europe, the fears associated with the coming economic burden have been unduly exaggerated through the use of the simplistic and inappropriate conventional age-dependency ratio. There are plausible scenarios where feasible public policies could be effective in coping with the consequences of population aging. Depending on the policy options preferred and available––encouraging higher labor-force participation among the native population and/or education-selective migration together with high integration efforts––Europe could largely avoid the widely assumed negative impacts of aging and maintain a dynamic labor force based on high human capital.

Source: Population aging, migration, and productivity in Europe | PNAS